Home sales in most major markets might have improved in the last one quarter, but the country's top real estate firms have been unable to bring down their debt. The net debt of India's top 11 listed real estate companies at the end of December 2011 rose 14% from a year ago to Rs 41,700 crore. A major portion of the increase came from Godrej Properties' acquisition of a commercial project in Bandra-Kurla Complex in Mumbai.

The company's net debt increased 67% at the end of October-December quarter, compared to the previous quarter. Even some successful large asset monetisation by the likes of DLF did not help in reducing overall debt for the sector. DLF, which had raised Rs 1,200 crore during the quarter from the sale of non-core assets like the IT Park in Noida and IT SEZ in Pune, did not use the entire proceeds to towards debt reduction, which was its stated objective.

During the quarter, the company spent around Rs 370 crore to buy land in Chandigarh and new Gurgaon, Rs 120 crore to buy out Hilton's stake in a joint venture, Rs 80 crore for capex andRs 70-80 crore to pay additional government charges in some of its new launches. Its net debt in the quarter was down only 0.73% q-o-q, fromRs 22,927 crore to Rs 22,758 crore. Sobha Developers, though, reduced its debt in the quarter by selling its land parcel in Gurgaon.

"Debt servicing will continue to remain the bete noire of the sector, especially as $11 billion of PE investments are likely to attain maturity over the next 2-3 years," said Aashiesh Agarwaal, real estate analyst at Edelweiss Securities, in a recent report on the sector. At the moment, most developers are busy taking care of their debt and spending more time on cash management than their core business.

"For sure, they are in a debt trap, it's a classic case. To get out of this, a lot of liquidation is required. They'll have to put even their prime portfolio on the block or get into expensive private equity deals," says Amit Goenka, national director, capital transactions at Knight Frank India. While debt has remained high for these 11 listed real estate firms, in the last one quarter, sales volumes have surged 37%, especially for players in the NCR, with the resolution of the Noida land row, and in Bangalore.

With declining inflation, cost pressures have not risen any further, thereby improving margins. "The amount of short-term debt that real estate companies have taken for specific projects has risen. While this will bloat up the overall debt figure, it will eventually improve cash flows if the money is channelised properly for completion of projects," says Rajiv Sahni, partner at Ernst &. For most realty companies de-leveraging their balance sheet has been a top priority over the last two years. Many of these are selling non-core assets and even land parcels in their endeavor to lower the debt burden.

While a number of asset monetisation deals have happened in the recent past, many others are stuck because of a valuation mismatch. "Developers will now have to lower their price expectation to see these deals through," said Jasdeep Walia, real estate analyst at Kotak Securities.